How manufacturers and local authorities could gain from business rates reform

Yesterday the government announced that the uniform business rate, or multiplier, for financial year 2016/17 will be set at 49.7p.

How are business rates calculated?

This means that the national multiplier will be at its highest level ever since the current version of the business rates system was introduced in 1990.

A volatile system is a poor system

This is important as it highlights the volatility of the system. Volatility affects manufacturers as it undermines the long-term planning needed for return on investment and additional replacement cycles for equipment.

The current 2010 Rating List started off with a multiplier of 41.4p, the lowest level ever since the first full revaluation of properties for the 1995 Rating List, or since 1992 overall. This was because RPI turned negative as a result of the recession.

Since 2010 we’ve also seen RPI at 5.6% (in 2011/12) the second highest since 1990. The cumulative effect of such a high multiplier means that businesses have felt particularly squeezed over the last seven years.

EEF has long argued that the annual uprate should be shifted from September’s RPI to an annual CPI average.

Because CPI is a more stable measure of inflation this would make bills more stable year on year, without eroding the long-run tax base. CPI is also more reflective of real cost pressures in the economy, RPI isn’t even an official national statistic.

Manufacturers need a business rates system that supports their investment decisions and is cost competitive internationally, this will help to anchor manufacturing in the UK. Predictability and stability is a core part of this, something RPI is the very opposite of.

Shifting to an annual average CPI rate will also help to reduce the burden on businesses, creating a more cost competitive system. If this had been implemented at the start of the current Rating List, the total saving over 7 years for the average ratepayer would have been £2,321 at an annual policy cost of £581m.

To put that cost in context, the amount central government had to pay to local authorities in 2015/16 to compensate them for a range of temporary reliefs (such as retail relief) was £596m.

Removing plant and machinery would support stability

As we set out in our submission to the Communities and Local Government Select Committee on business rates reform:

Having an aspect of the tax base that fluctuates depending on the level of investment in plant and machinery does not help local authorities with setting and maintaining stable budgets. This is an even bigger concern as the government looks set to put in a place a more long-term needs assessment regime, with fewer resets, for local authority budgets and tying that to the existing stock of business rates yield (including rated plant and machinery) in each local area.

EEF believes removing plant and machinery would go hand in hand with not just pursuing growth, by removing a disincentive to invest, but would also support local authorities to have certainty over their budgets in the long-term.

This can be achieved by the government immediately derating Class IV of The Valuation for Rating (Plant and Machinery) (England) Regulations 2000 for existing and new items.